Income tax law requires the assessee to get their books of accounts audited by a Chartered Accountant under the provisions of Section 44AB of the Income Tax Act, 1961. The Chartered Accountant conducting the tax audit is required to submit their findings and observations in the form of an audit report on the e-filing portal of the Income Tax Department using Form No. 3CA or 3CB, along with Form 3CD.
Criteria for Conducting Compulsory Tax Audit
A tax audit becomes mandatory under certain conditions based on the nature of the assessee’s business or profession and their turnover or receipts.
Business Not Opting for Presumptive Taxation under Section 44AD.
When a person is carrying on a business and does not opt for the presumptive taxation scheme under section 44AD, a tax audit is mandatory if the total sales, turnover, or gross receipts exceed one crore rupees in the relevant previous year.
However, the threshold limit is increased to ten crore rupees if both of the following conditions are satisfied:
Cash receipts do not exceed five percent of the total receipts or turnover.
Cash payments do not exceed five percent of the total aggregate payments in the relevant previous year.
For this calculation, a cheque or bank draft not bearing an account payee marking is deemed to be a cash transaction.
Business Opting for Presumptive Taxation under Section 44AD.
If an assessee opts for presumptive taxation under section 44AD and declares profits on a presumptive basis, but later chooses not to declare profits on a presumptive basis in any of the next five consecutive assessment years, then the assessee is required to maintain books of accounts and get them audited under section 44AB, provided their income exceeds the basic exemption limit in those years.
Business Eligible for Presumptive Taxation under Section 44AE, 44BB, or 44BBB
An assessee carrying on business under sections 44AE, 44BB, or 44BBB is required to get their accounts audited under section 44AB if they claim that their profits or gains are lower than what is computed under the applicable presumptive taxation scheme.
Professionals
A person engaged in a profession must get their accounts audited if the gross receipts from the profession exceed fifty lakh rupees in the relevant previous year.
Notified Professionals under Section 44AA
Certain notified professionals under section 44AA, such as legal, medical, engineering, accountancy, architecture, interior decoration, and technical consultancy, must get their accounts audited if their gross receipts do not exceed fifty lakh rupees but they declare profits lower than the profits computed under section 44ADA and their total income exceeds the basic exemption limit.
Manner of Filing Tax Audit Report
The tax audit report must be submitted online by the Chartered Accountant using their official login credentials on the e-filing portal of the Income Tax Department. The assessee must first add the details of their Chartered Accountant in their login portal.
After the Chartered Accountant uploads the audit report, the assessee must either accept or reject the report from their login. If the report is rejected for any reason, the entire procedure needs to be repeated until the report is finally accepted.
The tax audit report must be filed on or before the due date for filing the return of income. Generally, this is 30th September of the assessment year for most assessees, or 31st October if the assessee has entered into international transactions. These dates may be extended for specific assessment years by notifications.
Tax Audit Report Forms under Section 44AB
Different forms are applicable depending on the type of assessee and the nature of the audit.
Form 3CA
Form 3CA is applicable when the assessee is already required to get their accounts audited under any other law, such as the Companies Act. The Chartered Accountant provides their observations related to the tax audit in this form.
Form 3CB
Form 3CB is applicable when the assessee is not required to get their accounts audited under any other law. This form includes the observations of the Chartered Accountant with respect to tax audit under the income tax provisions.
Form 3CD
Form 3CD is an annexure to Form 3CA or 3CB. It contains detailed particulars required to be reported during the tax audit. This form is mandatory for all assessees undergoing a tax audit under section 44AB.
Overview of Form 3CD
Form 3CD is divided into two parts:
Part A contains clauses from clause 1 to clause 8A
Part B contains clauses from clause 9 to clause 44
Each clause requires specific information, disclosures, and verification from the auditor based on the financial statements and other documents of the assessee.
Clause 1
The auditor must ensure that the name of the assessee mentioned in Form 3CD matches the name as per the Income Tax Department records. If there is a change in name between the end of the financial year and the date of the audit report, both the old and new names should be reported.
Clause 2
This clause requires the address of the assessee to be reported. The address should match the one communicated to the Income Tax Department for assessment purposes as on the date of signing of the audit report.
Depending on the situation, the following address details must be reported:
For a new assessee, the address of the principal place of business
For a company, the principal place of business, along with the registered office address
If the assessee has branches, then branch addresses should also be included..
If the address has changed after the end of the financial year but before the audit, the new address may also be provided
Clause 3
The Permanent Account Number (PAN) of the assessee must be reported. The auditor must verify the PAN from the PAN card. If the assessee does not have a PAN, then Aadhar details should be mentioned. If the assessee has more than one PAN, the one used for filing income tax returns must be mentioned here, and the other PAN must be reported in Form 3CA or 3CB.
Clause 4
The assessee must report details of any registration obtained under indirect tax laws such as excise, service tax, VAT, GST, or customs. The auditor must verify these registration details through the registration certificates issued under the relevant laws.
If the assessee operates multiple branches, the registration details of all such branches must be included. If the assessee is in the process of obtaining such registration, this fact should be mentioned in the audit report.
Clause 5
This clause relates to the status of the assessee as per section 2(31) of the Income Tax Act. The status could be individual, HUF, company, firm, etc. LLPs are treated as firms for this purpose. A foreign LLP is treated as a company.
If there is a change in the status of the assessee during the year, the status as on the last date of the previous year should be reported, and a note should be included explaining the change.
Clause 6
This clause requires the auditor to mention the period for which the books of accounts are audited. Normally, this would be the financial year from 1st April to 31st March. In special cases such as amalgamation, demerger, or business reconstitution, the period may be different. The auditor must report the starting and ending dates clearly.
Clause 7
The assessment year relevant to the previous year being audited must be stated. For example, if the previous year is 2021-22, then the assessment year will be 2022-23.
Clause 8
The clause of section 44AB under which the audit is conducted must be clearly stated. While submitting the report online, the relevant clause must be selected from a drop-down list.
Clause 8A
This clause is newly added. It requires the auditor to mention whether the assessee has opted for any special taxation regime under section 115BA, 115BAA, 115BAB, 115BAC, or 115BAD. The response should be either yes or no. If yes, then the auditor should obtain and verify a copy of Form 10-IB, 10-IC, or 10-ID filed online by the assessee.
Section 115BAC applies to individuals or HUFs opting for the new tax regime with lower tax rates and no deductions or exemptions.
Section 115BAD applies to co-operative societies opting for a 22 percent tax rate, subject to certain conditions and non-allowability of specific deductions.
Clause 9
This clause requires the auditor to report whether the books of accounts are prescribed under section 44AA and whether they have been maintained by the assessee. The auditor must also state the list of books maintained and the address where such books are kept. If the books are maintained at multiple locations, the address of each location should be mentioned. If the assessee has failed to maintain the prescribed books of accounts, the fact should be reported along with a suitable explanation.
Clause 10
In this clause, the auditor must report the nature of the business or profession carried on by the assessee during the relevant previous year. If there has been any change in the business or profession as compared to the preceding year, the details of such change must be reported. This includes the commencement of a new business, discontinuation, merger, demerger, or any other restructuring of the business activity.
Clause 11
This clause pertains to the maintenance of books of accounts. The auditor is required to report whether the books are maintained on a cash basis, mercantile basis, or a hybrid system. The method of accounting should be consistently followed year after year. If there is any deviation in the method of accounting, the nature and effect of such deviation should be disclosed.
Clause 12
This clause requires the auditor to state whether there were any changes in the method of accounting employed in the previous year as compared to the immediately preceding previous year. If any change has occurred, its effect on the profit or loss must be quantified and reported clearly.
Clause 13
Under this clause, the auditor must mention the method of valuation of closing stock employed during the previous year. If there is any deviation from the method prescribed under section 145A or any inconsistency in the valuation method compared to the earlier year, it must be reported along with the effect on profit or loss.
Clause 14
This clause requires the assessee to report whether the central government has prescribed any accounting standards under section 145(2) of the Act. If yes, then the auditor has to state whether such standards have been complied with and report any deviations from them.
Clause 15
In this clause, the auditor must furnish the details of capital assets converted into stock-in-trade during the relevant previous year. The description of the capital asset, the date of acquisition, the cost of acquisition, the date of conversion, and the value at which it was converted into stock-in-trade must be disclosed.
Clause 16
This clause requires disclosure of amounts not credited to the profit and loss account but included in the computation of total income. These include items like capital receipts, income chargeable under other heads, or income exempt under various sections, but not routed through the profit and loss account.
Clause 17
The auditor must report in this clause whether any land or building, or both were transferred during the year, and if such transfer falls under section 50C or 43CA, then the details of the consideration received and the stamp duty value should be provided.
Clause 18
This clause requires the auditor to furnish the particulars of depreciation allowable under the Income Tax Act. This includes block-wise details of the assets, the opening written-down value, additions or deletions during the year, and the closing written-down value. If there is any adjustment in depreciation due to revaluation or any other reason, it must also be reported.
Clause 19
This clause deals with amounts admissible under various sections such as 32AC, 33AB, 33ABA, 35, 35AD, 35CCA, 35CCB, 35CCC, 35CCD, and others. The auditor must ensure that the conditions prescribed under the respective sections have been complied with and the deductions have been appropriately claimed.
Clause 20
This clause requires the auditor to furnish particulars of any bonus or commission paid to employees that would otherwise be payable as profit or dividend. The auditor must ensure that such payments have been made by the employment agreement and not as a way to avoid tax.
Clause 21
This clause is divided into several sub-parts and deals with disallowances under various sections of the Act.
Clause 21(a) relates to inadmissible expenses under section 40(a), such as payments on which tax was deductible but not deducted or not deposited within the due date.
Clause 21(b) relates to payments covered under section 40A(3) and 40A(3A), which are disallowed if payments exceeding the prescribed limit are made in a manner other than an account payee cheque, draft, or electronic transfer.
Clause 21(c) deals with amounts inadmissible under section 40A(7), relating to provisions for gratuity.
Clause 21(d) pertains to amounts inadmissible under section 40A(9) relating to contributions made to any fund or trust that is not approved.
Clause 21(e) covers any inadmissible amounts under section 43B unless paid during the year. This includes taxes, duties, cess, employer contribution to PF, and other statutory liabilities.
Clause 22
This clause requires reporting of any amount inadmissible under section 23 of the Micro, Small,, and Medium Enterprises Development Act, 2006. This relates to interest payable to micro or small enterprises on delayed payment, which is not allowable as a deduction.
Clause 23
Under this clause, the auditor must furnish details of payments made to persons specified under section 40A(2)(b). The name of the person, relationship, nature of payment, and amount must be clearly stated to ensure that such payments are not excessive or unreasonable, having regard to market value.
Clause 24
This clause requires the assessee to disclose the amounts deemed to be profits and gains under section 32AC, 33AB, 33ABA, and others, due to violation of conditions laid out under those sections.
Clause 25
This clause relates to profits chargeable to tax under section 41. This includes remission or cessation of trading liabilities, recovery of loss or expenditure previously allowed, or recovery of bad debts previously written off.
Clause 26
This clause requires details of any sum received from employees towards provident fund, superannuation fund, or employee state insurance, which has not been credited to the employee’s account in the relevant fund on or before the due date.
Clause 27
This clause requires reporting of any CENVAT credit or input tax credit availed during the year. If such credit pertains to capital assets and has not been credited to the profit and loss account, the fact should be disclosed along with the treatment in the books of accounts.
Clause 28
This clause requires the auditor to state whether the assessee has received any amount as an advance or otherwise in respect of which a capital asset is transferred, and such transfer is not effected during the year. This is relevant for section 2(47), which defines transfer.
Clause 29
This clause relates to income not chargeable to tax as per section 56(2)(ix) and 56(2)(x). These sections cover advances received and forfeited for negotiation of transfer of a capital asset and gifts received by individuals or HUFs beyond a certain threshold.
Clause 30
This clause deals with the details of primary adjustments to transfer price as referred to in section 92CE. The assessee must report any primary adjustment made to the transfer price and the details of the excess money available with the associated enterprise, which is to be repatriated to India. If such excess money is not repatriated within the prescribed time, interest liability is attracted under the provisions of this section.
Clause 30A
This clause requires reporting under section 92CE(2A), which relates to secondary adjustments in case of excess money not repatriated as per prescribed timelines. The auditor must verify whether the assessee has made any secondary adjustments and has paid interest under the law.
Clause 30B
This clause pertains to the General Anti-Avoidance Rules. The auditor must report whether the assessee has entered into an impermissible avoidance arrangement and furnish the necessary particulars if applicable. The auditor must evaluate whether any transaction entered by the assessee falls within the purview of the GAAR provisions.
Clause 30C
This clause requires the assessee to disclose whether they have received or made any payment, like an impermissible avoidance arrangement. The clause aims to ensure compliance with anti-abuse provisions and promote transparency.
Clause 31
This clause requires reporting of any loans or deposits accepted or repaid in violation of section 269SS or 269T. The details should include the name of the lender or depositor, address, PAN or Aadhaar number, amount of loan or deposit accepted or repaid, mode of transaction, and the date of transaction. The auditor must verify that all such transactions have been conducted through account payee cheques, drafts, or electronic modes to comply with legal provisions.
Clause 32
This clause requires details of each brought forward loss or depreciation allowance under the Income Tax Act. The auditor must provide the year of claim, nature of loss, assessment year in which loss was incurred, and the amount of such loss or allowance. This helps in verifying the legitimacy and continuation of losses or depreciation that have been carried forward and claimed during the current assessment year.
Clause 33
This clause requires reporting of deductions claimed under Chapter VIA of the Act. This includes deductions under sections like 80C, 80CCC, 80CCD, 80D, 80G, 80IA, 80IB, 80JJA, and others. The auditor must verify that these deductions are supported by proper documents and are claimed under the conditions specified in each section.
Clause 34
This clause is subdivided into three parts.
Clause 34(a) requires the auditor to report whether the assessee is required to deduct or collect tax at source under the provisions of Chapter XVII-B or XVII-BB. If yes, the auditor must provide the details of tax deducted or collected, the rate at which it was deducted or collected, and whether the deducted amount was deposited within the prescribed time.
Clause 34(b) requires the auditor to verify and report whether the assessee is liable to furnish statements under sections 192(2C), 200(3), 206C(3), or 206C(3A) and whether such statements have been furnished within the prescribed time.
Clause 34(c) requires verification of interest liability under sections 201(1A) or 206C(7) for late deduction or non-deduction of tax, and whether such interest has been paid.
Clause 35
This clause requires the assessee to report details of income in respect of which tax is deductible under Chapter XVII-B but has not been deducted. The auditor must also provide the details of such payments, recipients, and reasons for non-deduction. This clause ensures reporting of all payments that might attract disallowance under section 40(a)(ia).
Clause 36
This clause requires reporting of tax on distributed profits under section 115-O and tax on distributed income to unit holders under section 115R. The auditor must verify whether these taxes were applicable and whether they have been paid within the prescribed time.
Clause 37
This clause pertains to the cost audit conducted under section 148 of the Companies Act. If the assessee is subject to a cost audit, the auditor must report whether the cost audit has been carried out, and if yes, the details of the cost auditor, the period of audit, and the date of filing the cost audit report must be mentioned.
Clause 38
This clause relates to the audit under the Central Excise Act, 1944, or under the Finance Act, 1994, in respect of service tax. If such audits have been conducted, the details of the audit, period covered, and audit observations must be provided.
Clause 39
This clause requires details of any demand raised or refund issued under any tax laws other than income tax during the previous year. The auditor must report the nature of the demand or refund, the relevant section, the amount, and the date of the demand or refund.
Clause 40
This clause relates to the particulars of any transaction reported under section 285A of the Act. It includes disclosures relating to any interest in a foreign entity or any transaction with such entities that may be reportable under foreign asset reporting requirements.
Clause 41
This clause requires the assessee to report any expenditure incurred during the previous year on corporate social responsibility activities. The auditor must verify whether such expenditure has been accounted for properly and whether it is by the provisions of the Companies Act.
Clause 42
This clause pertains to the reporting of any undisclosed income found during the course of a search under section 132 or a survey under section 133A. The assessee must report such income and whether it has been disclosed in the return of income filed for the relevant year.
Clause 43
This clause requires the auditor to report the break-up of total expenditure incurred during the year concerning goods or services. The details must be bifurcated into payments made to registered and unregistered persons under the GST law.
Clause 44
This clause requires reporting of the break-up of total expenditure incurred concerning various heads of expenditure, such as purchases, salary, rent, interest, and others. The information must be provided along with details such as whether the supplier is registered under GST and whether input tax credit was availed.
Importance of Accuracy in Form 3CD Reporting
Each clause of Form 3CD plays a critical role in tax compliance. Proper disclosure helps the Income Tax Department to assess the correctness of income declared, deductions claimed, and statutory obligations fulfilled by the assessee. Any mistake, omission, or misstatement can attract penalties and further scrutiny. Hence, it is essential that the Chartered Accountant and the assessee collaborate closely, share accurate information, and adhere to statutory deadlines and audit requirements.
Clause 33: Deductions under Chapter VIA
This clause deals with the deductions claimed under Chapter VIA of the Income Tax Act. It includes various sections such as 80C (investment in PPF, LIC), 80D (medical insurance), 80G (donations), 80IA to 80RRB (specific business deductions, royalty income, etc.). The auditor must verify and report the nature and amount of deductions claimed. The details of each deduction are filled in, along with confirmation that these deductions are allowable. If the taxpayer is a company not liable for Minimum Alternate Tax (MAT), then the auditor needs to ensure that Chapter VIA deductions are computed correctly and reported accordingly.
Clause 34: TDS Compliance
This clause requires the reporting of tax deducted at source (TDS) and tax collected at source (TCS). It has three parts:
Part A: Details of TDS and TCS obligations under the Income Tax Act
Part B: Whether the deductor has complied with the provisions regarding deduction and deposit of TDS and TCS
Part C: Whether the deductor has furnished TDS/TCS returns under Section 200(3) or Section 206C(3)
The auditor must confirm whether tax was deducted/collected wherever applicable, whether it was deposited within the due date, and whether appropriate returns were filed. Any failure to deduct or deposit TDS/TCS must be reported, along with the amount of tax involved.
Clause 35: Details of Interest Payable Under Sections 201(1A) and 206C(7)
This clause focuses on interest payable due to failure to deduct or deposit TDS/TCS. The auditor must verify whether the assessee has paid interest under Section 201(1A) (for non-deduction/non-payment of TDS) and Section 206C(7) (for TCS defaults). The auditor should verify challans for payment of interest and ensure proper disclosure in Form 3CD.
Clause 36: Receipts Under Section 43CA or 50C or 56(2)(x)
This clause requires disclosure of transactions involving immovable property where the consideration received is less than the stamp duty value. The auditor should verify whether the sale consideration of the property was less than its stamp duty value. In such cases, the stamp duty value is deemed to be the sale consideration under these sections for computing income. The auditor needs to report the difference and mention whether the taxpayer has offered such a difference as income. This clause aims to detect under-reporting of income from the sale of property.
Clause 37: Cost Audit
If the taxpayer is liable for a cost audit under the Companies Act, this clause mandates the reporting of the cost audit report. The auditor should mention whether a cost audit is applicable and if so, whether the report has been filed under the Companies Act. He should also state the date of filing with the Ministry of Corporate Affairs and furnish the qualifications, if any, in the cost audit report.
Clause 38: Central Excise Audit
This clause requires reporting whether the taxpayer is liable for a central excise audit under the Central Excise Act. The auditor should disclose the applicability and details of such audit, including the findings, if any, that have a bearing on income tax computation. If any adjustment is made in the excise audit that affects taxable income, it must be disclosed in this clause.
Clause 39: Service Tax Audit
Similar to Clause 38, this clause asks about the service tax audit. The auditor must check whether the taxpayer was subjected to a service tax audit during the year and mention any relevant observations that havee an income tax impact. The clause ensures proper reporting of revenue and service tax compliance.
Clause 40: VAT Audit
This clause applies where a VAT audit was conducted under the respective State laws. The auditor should report the applicability, date of filing of the VAT audit report, and any adverse observations having relevance to the income tax audit. This ensures uniformity in reporting between indirect taxes and income tax returns.
Clause 41: Transfer Pricing and Form 3CEB
This clause applies to international transactions and specified domestic transactions. It asks whether the taxpayer has entered into any such transactions requiring compliance with transfer pricing provisions under Sections 92 to 92F. The auditor must mention whether Form 3CEB (transfer pricing audit report) has been filed and whether the required disclosures have been made. This ensures that pricing in related-party transactions is done at arm’s length.
Clause 42: Demand Raised or Refund Issued Under Tax Laws
This clause requires reporting of any demand raised or refund issued under any tax law (other than the Income Tax Act) that has a bearing on the income tax computation. For example, if an excise duty refund was received, the auditor should verify whether it is taxable. If any liability or demand under another tax law leads to a disallowance under the Income Tax Act, it must be reported here.
Clause 43: Country-by-Country Reporting (CbCR)
This clause applies to entities subject to CbCR under Section 286. The auditor needs to report whether the taxpayer is an alternate reporting entity of an international group and whether it has filed the required country-by-country report. This is primarily applicable to large multinational groups and is a part of the BEPS (Base Erosion and Profit Shifting) action plan of the OECD. The clause ensures disclosure of global income distribution, taxes paid, and economic activity.
Clause 44: Breakup of Total Expenditure Based on GST Registration
This clause mandates the reporting of total expenditure incurred during the year, segregated as follows:
Expenditure relating to entities registered under GST
Expenditure relating to entities not registered under GST
Expenditure on exempt supply
Expenditure under the composition scheme
Expenditure relating to unregistered dealers
The purpose is to track GST compliance through income tax audit and to check for mismatches between ITC claimed and the GST status of suppliers. Auditors must ensure reconciliation of purchases with GST returns.
Complexity of Tax Laws
Tax laws in India are constantly evolving. Frequent amendments in the Income Tax Act, notifications, and circulars create compliance challenges for both auditors and taxpayers. The auditor must keep track of these changes to ensure proper reporting under Form 3CD.
Reconciliation Between Income Tax and Other Laws
Form 3CD requires reconciliation with other tax laws such as GST, VAT, Service Tax, and Customs. This poses a challenge,, especially when the financial systems are not integrated or maintained manually. Any discrepancy between indirect tax records and income tax disclosures may result in audit objections.
Volume of Reporting
Form 3CD requires exhaustive details under multiple clauses. Large organizations with high transaction volumes may find it difficult to collate and verify all required data. This increases the risk of errors and omissions in reporting.
Technology Limitations
Although many companies use ERP systems, many small and medium-sized businesses still use spreadsheets or outdated softwar,,e which makes it difficult to extract accurate and timely data for audit. Non-availability of automated reports hinders the audit process.
Penalties for Non-Compliance
Failure to conduct a tax audit or to furnish the report in time attracts penalties under Section 271B. The penalty is 0.5% of turnover or Rs. 1,50,000, whichever is lower. In addition, incorrect reporting or concealment of income discovered during a tax audit can lead to further penalties and prosecution.
Importance of Tax Audit for Stakeholders
Government
Tax audit enhances the government’s ability to detect evasion, improve compliance, and ensure proper tax collection. The audit report provides structured financial information that helps in data analytics and risk assessment.
Taxpayers
For taxpayers, a tax audit ensures proper verification of accounts and helps in early detection of errors or omissions. It also provides credibility to financial statements and reduces the chances of scrutiny or reassessment by tax authorities.
Tax Professionals
For chartered accountants and auditors, tax audit is a professional responsibility and an opportunity to guide businesses towards compliance. It helps build trust and long-term relationships with clients.
Lenders and Investors
Audited financials backed by tax audit reports provide assurance to banks, financial institutions, and investors. It improves the creditworthiness of the business and facilitates easy access to loans and funding.
Conclusion
Tax audit plays a crucial role in the Indian tax regime by ensuring accuracy in reporting income and expenses. The extensive reporting requirements of Form 3CD help the Income Tax Department verify compliance with various provisions of the Act. With the increase in digitization and the use of data analytics by tax authorities, the role of a tax audit has become even more significant. Businesses must take taxaudits seriously and ensure timely and accurate compliance to avoid legal consequences and penalties. Tax auditors, in turn, must approach their role with diligence, professional skepticism, and up-to-date knowledge to ensure they meet their statutory responsibilities effectively.